Nintendo (NASDAQOTH:NTDOY) is off to a good start in 2017. The new Switch console is selling extremely well, and the company is beginning to make a push into mobile gaming in order to reach the maximum audience with its classic game brands like Mario.
Learning from mistakes
One reason for the Switch's success is the corrections Nintendo made with its marketing compared to its previous Wii U console, which sold very poorly. Nintendo has focused its marketing this time around on selling the portability of the device, and early signs would suggest that strategy is working given the strong demand so far (more on that in a minute).
Switch advertising has also been notable for featuring young adults as opposed to children. While the company wants to reach all ages with its new gaming system, young adults comprise the hardcore gaming market -- those who favor gaming on PC, Sony's Playstation 4, or Microsoft's Xbox One. The marketing strategy also reflects Nintendo's need to keep a healthy market open for its 3DS handheld device, which might be a better starter gaming platform for children than Switch.
With Switch, Nintendo is clearly trying to bring back to its fold the gamers who ditched Nintendo in the last few decades for more adult-centered games on Playstation or Xbox.
But it will take a lot more than marketing to reach these older gamers.
Nintendo of America President Reggie Fils-Aime told Forbes that Nintendo is committed to delivering a solid platform for third-party developers:
What third parties want are: a large, growing install base, a development environment that's easy for them to work in, they want the ability to monetize their content -- whether on the initial sale or downloadable content. That's what they want. And we were not able to deliver that fully on the Wii U. We are going to be able to deliver that fully with Nintendo Switch.
-- Reggie Fils-Aime
With Nintendo planning to double Switch production from 8 million to 16 million for the first year based on strong demand, the company is well on track to have the installed base needed to attract third-party development studios to make games for Switch.
In addition, Nintendo made a very important decision to support the Unity and Unreal game engines. Unity and Unreal are two commonly used game development tools, and since Switch is compatible with these two platforms, third-party developers should find the console very developer-friendly. Early signs look good as Bethesda -- the developer of hit games Fallout and Skyrim -- will be supporting a Nintendo console for the first time.
Nintendo is also making sure it provides a solid online environment for developers to monetize games with additional content. The emergence of digital revenue streams from in-game downloadable content is an important business model for game publishers. Top game publishers like Electronic Arts and Activision Blizzard derive most of their revenue from digital sources, including subscriptions and downloadable content purchased directly over consoles. If Nintendo doesn't offer a good online environment on Switch, publishers may be reluctant to support the console.
Steady cadence of game releases
The main criticism of Switch was the light slate of games available at launch. Other than the new Zelda game, there didn't seem to be anything else to attract console buyers. Nintendo made a strategic decision to go with a steady rhythm of game releases spread out over the first year instead of launching the console with a bunch of games at the start.
Launch day is not the be-all and the end-all. It really is the steady pacing of content that continually reinforces for the people who bought into the platform why they made a smart choice, as well as what compels people who might be sitting on the sidelines to jump in.
-- Reggie Fils-Aime (Quote from CNET)
So far, the strategy is working out brilliantly. Zelda: Breath of the Wild might be one of the best games ever made, according to Metacritic's initial review score. It's one of the highest rated games on all gaming platforms, and it seems to be helping Nintendo sell a lot of Switch consoles given the report from retailer GameStop and other sources that the ratio between Switch and Zelda sales are high.
The month of March is typically a very slow time of year for video game sales, which makes Switch's success even more impressive. Nintendo's strategy is to build up to the holidays: Release a high-quality game in Zelda to attract buyers up front during a slow season, trickle out a few other games over the summer and fall to keep interest up, and save one more Switch-selling title in Super Mario Odyssey for a strong holiday quarter.
Increasing audience reach
This game release strategy also plays a key role in how Nintendo plans to attract all age groups, "from 5 to 95." One way it will accomplish this is by releasing a series of games that will fill in the demographics gap. Some games will be child- and grandparent-friendly, while others will have a narrower market that targets hardcore gamers.
We believe that our systems need to be mass market systems, from 5 to 95. A broad footprint. But each game is going to appeal to a certain part of that demographic. And it'll fill out the base. That strategy continues. This is a system for everybody. This is a system that will appeal to a wide group. It's going to get filled in over time as the different games come in.
-- Reggie Fils-Aime (Quote from Time)
By the time the holidays roll around, the plan is that Nintendo will have stirred up interest to a fever pitch assisted by a lineup of games appealing to all demographics.
Going beyond Switch, Nintendo has a big opportunity to reach a bigger audience with classic franchises like Mario, Donkey Kong, and others on mobile devices. Nintendo President Tatsumi Kimishima recently stated that the company plans to continue releasing mobile games.
We plan to continue releasing two to three titles per year that consumers can enjoy as Nintendoʼs smart-device applications.
Super Mario Run was released in December 2016 on Apple's iPad and iPhone, and it was recently released on Alphabet's Android mobile platform. The game was downloaded 78 million times as of January and generated $53 million in revenue from players who decided to pay $10 to unlock the full game.
The mobile gaming market generated an estimated $40 billion in revenue in 2016 and is growing much faster than game sales on PC and console. Super Mario Run was a nice start as Nintendo attempts to monetize classic franchises on mobile devices. Further progress in Nintendo's mobile efforts could eventually lead to a lucrative business segment for the company.
However, mobile is something new to the company and may not be in its DNA. Nintendo may fumble the opportunity, or it could turn it into gold. We'll have to see.
Only time will tell whether Nintendo management has the right strategy in place to turn the business around, but early results across Switch and mobile show that the company is moving in the right direction.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. John Ballard owns shares of Activision Blizzard and Nintendo. The Motley Fool owns shares of and recommends Activision Blizzard, Alphabet (A and C shares), and Apple and has the following options: long January 2018 $90 calls on Apple, short January 2018 $95 calls on Apple, and short April 2017 $28 puts on GameStop. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.
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